The High Price of Investing in a Hedge Fund

GUS SAUTER: Many investors probably don’t realize that the average hedge fund typically underperforms the stock market. There are a number of reasons that a hedge fund might lag behind the market rate of return, but one significant cause is very high costs.

These costs come in the form of high fees and high transaction costs from trading activity. It stands to reason that if you want to maximize your return, you should minimize costs.

The less you give away, the more you keep. Don’t be fooled by the old saying, “You get what you pay for.”

The reality is, as Jack Bogle loves to say, “You get what you don’t pay for.”

So minimize the fees you pay and keep turnover low.

George U. “Gus” Sauter is a senior consultant to Vanguard Group Inc. From 2003 through 2012, Mr. Sauter served as Vanguard’s chief investment officer.